iRhythm Technologies, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. The filing identifies the registrant as iRhythm Technologies, Inc. (Nasdaq: IRTC). The company provides remote cardiac monitoring services through its Zio Systems, primarily to U.S. patients.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $124.1 | $102.1 | $235.6 | $194.4 |
| Gross profit / margin | $86.2 / 69.5% | $70.2 / 68.8% | $161.9 / 68.7% | $132.0 / 67.9% |
| Operating loss | $(18.9) | $(23.5) | $(58.4) | $(72.0) |
| Net loss | $(18.5) | $(23.9) | $(57.6) | $(74.5) |
| Adjusted EBITDA (non-GAAP) | $4.4 | $(5.0) | $(7.6) | $(9.7) |
| Basic and diluted loss per share | $(0.61) | $(0.80) | $(1.89) | $(2.51) |
- Growth and margins: Revenue grew 22% in Q2 and 21% in the first half, primarily from higher Zio service volume; management said this was partly offset by a slight decline in average selling price. Gross margin improved modestly.
- Costs: Q2 operating expenses rose 12% year over year, including 12% growth in selling, general and administrative expense and 14% growth in research and development. First-half SG&A increased 24%, primarily from headcount, business transformation, and infrastructure costs.
- Cash flow: First-half cash used in operations was $35.3 million, versus $39.3 million a year earlier. Capital expenditures were $17.8 million. Cash and cash equivalents declined to $61.6 million from $78.8 million at year-end; the cash flow statement reports a $17.3 million net decrease.
- Liquidity and debt: At June 30, cash, cash equivalents, and marketable securities totaled $164.7 million; current assets were $242.1 million and current liabilities $89.4 million. Debt was $34.9 million, with no revolving loans outstanding. The company reported $16.6 million available under its revolver and $40.0 million of remaining term-loan capacity. It was in covenant compliance.
- Other: Accumulated deficit was $579.8 million. CMS accounted for 25% of Q2 revenue and 24% for the first half. Stock-based compensation was $32.4 million in the first half.
Material changes versus prior year
- Net loss narrowed in both periods, and Q2 Adjusted EBITDA turned positive. First-half Adjusted EBITDA remained negative but improved year over year.
- First-half operating cash use decreased by $3.9 million. Management attributed the improvement mainly to timing of collections and payments, partly offset by increased purchases of printed circuit board assemblies.
- No impairment or restructuring charges were recorded in the first half of 2023, compared with $26.6 million in the first half of 2022, including a $23.2 million headquarters lease impairment.
- Interest and other income increased substantially, primarily because the company earned more interest on cash and marketable securities.
Outlook, risks, and contingencies
- Liquidity outlook: Management believes current cash, marketable securities, available term-loan capacity, and expected Zio revenue will fund operations and cash requirements for at least 12 months. The company expects ongoing operating losses and says it may need additional financing to support investment and growth.
- Costs and operations: Business transformation costs are expected to continue through 2023, with restructuring activities expected to be substantially complete by mid-2024. Management expects cost increases from labor, materials, shipping, inflation, and software amortization, partly offset by scale and process improvements.
- Reimbursement and seasonality: Medicare rates for relevant monitoring services took effect January 1, 2023; management notes rates may not reflect service costs and could be reduced. Revenue typically softens in the third quarter and around year-end holidays.
- Regulatory matters: The company received an FDA warning letter on May 25, 2023 concerning Zio AT medical-device reporting and quality-system matters. It responded on June 16 and is working with FDA; it cannot assure when or whether the agency will be satisfied. A previously reported Zio AT labeling correction was classified by FDA as a Class II recall, and the company requested closure in March 2023; the filing says it remained open in FDA’s database.
- Legal and government inquiries: A securities class action dismissed by the district court is on appeal; the Ninth Circuit heard argument July 13, 2023. The company also disclosed subpoenas from the U.S. Attorney’s Office and a separate April 2023 Department of Justice subpoena concerning its products and services; it is cooperating and cannot predict outcomes.
- Operating risks: Key risks include reimbursement changes and claim denials, billing and collection execution, reliance on single-source suppliers and semiconductor-affected PCBAs, capacity constraints, competition, regulatory compliance, and privacy and cybersecurity. The filing also cites inflation, hospital budget pressures, and supply-chain uncertainty.
Investor verification priorities
- Track revenue growth, average selling price, gross margin, and the path from positive Q2 Adjusted EBITDA to sustained profitability.
- Review operating cash use, receivables and collection trends, capital spending, and remaining liquidity; note that management’s 12-month liquidity view is not a guarantee.
- Monitor FDA’s response to the warning letter, resolution of the Zio AT matters, and any effects on product distribution or service delivery.
- Follow the DOJ inquiries and securities-litigation appeal, including any developments that could create financial or operational exposure.
- Verify future Medicare and commercial-payor reimbursement, claim denials and allowances, and the company’s ability to maintain supply and service capacity.
- Assess dilution and compensation costs: the filing reports substantial unrecognized RSU and PRSU compensation expense and approximately 2.8 million anti-dilutive options, RSUs, and PRSUs excluded from diluted loss per share.